The debt threat

April 18, 2011

For the first time in history, Standard & Poor's has revised its outlook on the nation's debt from "stable" to "negative." That sends a blunt message that Washington had better get its fiscal house in order, ASAP.

Monday's warning from the credit-rating agency blends into official Washington's theme of the month. Last week, President Barack Obama laid out a plan to cut deficit spending by $4 trillion over 12 years. The week before that, House Budget Committee Chairman Paul Ryan, R-Wis., proposed a more ambitious, $6 trillion cut over 10 years. A rump group of six senators, meantime, is working on a bipartisan deficit-cutting blueprint.

S&P didn't wait for the hot air to finish blowing before raising the prospect that at some point, the U.S. government may not be able to keep paying interest on its bonds.

The agency's threat to downgrade the sovereign debt of the world's biggest economy is a disturbingly big deal. A rating cut almost certainly would push interest rates higher, undermining the Federal Reserve's efforts to pump up the economy by printing money. It could — could — sound the opening bell for a debt crisis akin to those in Greece and other European countries that have lived way beyond their means for years.

If that day ever comes, all of us will wish we had listened back in 2011 to the throbbing alerts about our government's spending and borrowing. In the Republican budget plan, Ryan gives a chilling account of how a crisis would unfold: It likely would start with a sudden spike in interest rates. Then foreign investors who own roughly half of U.S. debt would lose confidence and start selling. As investors dump their government securities, interest rates would rise even more, and inflation would erode the value of the dollar. Unable to borrow on reasonable terms, America would have no choice but to win back the market's confidence by jacking up taxes and slashing programs. That would result in much harsher austerity than either Obama or Ryan has in mind.

S&P's statement didn't come as a complete surprise, and neither did the knee-jerk White House response. It boiled down to: Nothing to see here, Americans, just keep moving along. Why the faux nonchalance? The president is trying to regain the initiative from Republicans in the budget debate, and he doesn't want a bunch of credit wonks telling him to hurry up and reduce federal spending. Thus the University of Chicago's Austan Goolsbee, a key Obama economic adviser, on Monday criticized S&P for making a "political judgment."

Well, duh.

This is politics on a trillion-dollar scale. The overspending under fire isn't in the private sector, after all. It's the federal government that can't bring itself to stop borrowing more than $4 billion a day to pay for politicians' priorities. Other AAA-rated countries in similar straits have made hard decisions, the United Kingdom among them. So far, the U.S. hasn't, and the credit-rating agency is voicing doubt that Democrats and Republicans can bridge their political differences, absent another financial crisis.

True, the U.S. is a lot bigger than Britain, and our economy more flexible. It's also much more diversified and adaptable than the smaller European countries now in severe distress. But even the world's most powerful nation can't buy time forever when it's running up a tab it hasn't got the money to pay.

Goolsbee does make one good point: A debt crisis can be avoided. For now, the market doesn't speak with one mind. Some savvy traders have given up on U.S. debt. Others believe the problems will be corrected over time without too much pain. Even the major credit-rating agencies don't agree among themselves, and Goolsbee pointed to S&P rival Moody's, which called recent developments inside the Beltway "credit positive."

On that, we agree. Hearing the president embrace deficit reduction last week is positive. Now comes the hard part: reducing deficits.